Civil trust or commercial trust? How Colombian trusts work, explained for foreigners

If you come from the United States, the word trust brings to mind one flexible tool: a trustee holds assets for beneficiaries under a trust agreement, and the same structure can be used for estate planning, asset protection or a real estate deal.

Colombia does not work that way. Colombian law has two separate institutions that are both translated as "trust", and they come from two different codes, with different players and different uses: the civil fideicomiso, governed by the Civil Code, and the commercial fiducia (fiducia mercantil), governed by the Code of Commerce. Choosing the wrong one, or assuming one works like a U.S. trust, is a common and expensive mistake for foreign buyers and investors.

The civil fideicomiso: property that must pass to someone else

The civil fideicomiso is an old figure, closer to a conditional transfer than to a modern trust. The Civil Code defines it as property subject to the obligation of passing to another person when a condition is met. That transfer is called the restitution.

The three parties are:

• The settlor (constituyente), who creates it.

• The fiduciary owner (fiduciario), who holds the property while the condition is pending. Any person can play this role: a parent, a sibling, the settlor's spouse. No bank or license is needed. If no fiduciary is named, the settlor holds the property in that capacity.

• The beneficiary (fideicomisario), who receives the property when the condition is met. The beneficiary can be someone who does not exist yet, such as a future grandchild.

Key rules that surprise foreigners:

• It can only cover specific assets (one or more identified properties) or an inheritance or a share of it. It is not a general pool of investments.

• It must be created by public deed before a notary, or by will. If it includes real estate, it must be recorded in the property registry.

• Any condition that takes more than thirty years to happen is treated as failed, unless the event is the death of the fiduciary owner.

• While the condition is pending, the beneficiary has only an expectation, not a right over the property. They can ask for protective measures if the property is at risk, but they cannot use it or sell it.

• The fiduciary owner can sell or transfer the property, but always subject to the obligation of restitution.

Where it is used: almost entirely in family and estate planning. Typical examples are a parent who wants an apartment to pass to a child when the child reaches a certain age, or a family that wants a property to end up with a specific person under defined conditions. It is a private, low-cost arrangement between people, without an institution in the middle.

The commercial fiducia: a separate estate managed by a licensed trust company

The commercial fiducia is the modern tool, and it is the one most Colombian businesses mean when they say fiducia. Under the Code of Commerce, a person called the trustor (fideicomitente) transfers specific assets to a trust company (fiduciaria), which agrees to manage or sell them to achieve a purpose set by the trustor, for the trustor's own benefit or for a beneficiary. The same person can be trustor and beneficiary.

What makes it different:

• Only licensed entities can be the fiduciary: trust companies and credit institutions authorized by the Financial Superintendence. A relative or a private company cannot act as fiduciary in a commercial fiducia.

• The assets form an autonomous estate (patrimonio autónomo), kept separate from the trust company's own assets and from its other trusts.

• Those assets are not available to the trust company's creditors, and the trustor's creditors cannot go after them either, unless their claims existed before the trust was created. A trust created to defraud creditors can be challenged.

• When created between living persons, the Code of Commerce requires a public deed, recorded according to the type of asset (for real estate, in the property registry).

• Secret trusts are prohibited, and so are trusts in which the benefit passes to several people one after another.

• The trust company can never end up owning the assets for itself; any clause saying so has no effect.

Where it is used: the commercial fiducia is everywhere in Colombian business.

• Real estate development: buyers of off-plan apartments pay into a trust, and the money is released to the developer only when the project meets the agreed conditions. If you buy pre-construction in Medellín, Bogotá or Cartagena, your payments very likely go into one.

• Guarantees: a property or other asset is placed in trust to secure a loan, as an alternative to a mortgage.

• Administration and payments: a trust company collects income and makes payments for a project, a company or a family.

• Investment: collective investment funds and other vehicles managed by trust companies.

Side by side

| | Civil fideicomiso | Commercial fiducia | |---|---|---| | Governed by | Civil Code | Code of Commerce | | Who can be fiduciary | Any person | Only licensed trust companies and credit institutions | | What it does | Passes specific property to a beneficiary when a condition is met | Manages or sells assets to reach a purpose set by the trustor | | Separate estate | No | Yes, an autonomous estate | | Typical use | Family and estate planning | Real estate projects, guarantees, payments, investment | | Cost | Notary and registry fees | Trust company fees, usually monthly |

Which one fits

There is no general answer, because the two do different jobs. As a rough guide:

• If the goal is family: making sure a specific property reaches a specific person under specific conditions, at a low cost, the civil fideicomiso is worth looking at.

• If the goal is business: a project with buyers and lenders, a guarantee, an administration of funds, or a structure where a regulated institution must control the money, the commercial fiducia is the tool.

• If the goal is to replicate a U.S. revocable living trust, neither one is an exact equivalent. The design has to start from the result you want and then choose the Colombian vehicle, not the other way around.

Before signing any trust deed in Colombia, review who will hold title, what happens if the condition never occurs, how the arrangement is taxed, and how it interacts with your estate plan in your home country.

Informational content only. It is not legal advice and does not create an attorney-client relationship; each case depends on its own facts.

Responsible for this content: Camila Giraldo Bolívar, attorney admitted in New York and Colombia. GB Partners, Calle 5 A # 39-93, oficina 702, Medellín, Colombia. Phone and WhatsApp +57 305 234 6543. www.gbpartnersllc.com